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Hyliion (NYSE:HYLN) has some intriguing products and a significant amount of potential. Still, the company is facing several meaningful risks, while the valuation of HYLN stock remains elevated.

Source: Hyliion media

Additionally, investors remain skeptical about growth stocks in general and electric-vehicle stocks in particular. Based on the company’s elevated risk and high valuation, along with adverse macro factors, I recommend avoiding HYLN stock for now.

Hyliion’s hybrid system can convert most major Class 8 commercial trucks into hybrid electric vehicles. The product can also make trucks that already run on clean natural gas more powerful.

According to Hyliio’s CEO, Thomas Healy, the system can raise trucks’ fuel efficiency by between 7.3 miles per gallon and 8.3 miles per gallon. And an unnamed Hyliion customer says it thinks the system will ultimately reduce its costs by “$15,000 per truck,”  FleetOwner reported last June.

Meanwhile, Healy reports that companies can start making profits on their investments in the system in under two years. From this data, it’s easy to see that the system is much cheaper and has a much faster return on investment than buying a new battery-electric or hydrogen truck.

A Closer Look at Hyliion Stock

Another one of Hyliion’s products is the Hypertruck ERX, which has an all-electric drive system for heavy-duty trucks. The ERX features batteries that are charged by a generator powered by natural gas.

According to Hardy, there are over 700 stations in the U.S. that can provide vehicles with natural gas. He said a little more than half of the fuel used in these natural gas vehicles was renewable in 2020, up from 40% in 2019.

He added that over the last five years the amount of renewable natural gas in transportation is up 267% over the added Healy.

Among the advantages of the ERX is the extended life of its batteries that are expected to last longer than the trucks in which they are installed. The small size of its batteries, which are anticipated to be as little as 5% the size of those used by battery-electric trucks, are another factor.

The ERX’s batteries are also much cheaper than lithium-ion batteries and have a very high range, totaling more than 1,000 miles.

Additionally, the ERX can be powered by hydrogen using its existing drivetrain. As a result, those who buy the system can use natural gas in the near term, which is more easily obtained now than hydrogen. They can then switch to hydrogen over the longer term as more hydrogen stations are built.

Given all of these advantages, both the hybrid system and the ERX have a great deal of potential.

I could easily see many companies — in an effort to become more environmentally friendly and save money relatively quickly — buying one or both of Hyliion’s offerings. Consequently, I view the company and HYLN stock as quite intriguing.

The Risks Facing HYLN Stock

As I’ve written in the past, technologies that are out of the mainstream are somewhat risky, for the simple reason that it’s difficult to know whether and to what extent they will catch on.

Right now, when it comes to environmentally friendly trucks, hydrogen and battery-electric are the mainstream technologies; they are the technologies that are being backed by governments and by two of the most prominent auto companies in the world: Tesla (NASDAQ:TSLA) and General Motors (NYSE:GM).

So Hyliion’s hybrid and natural gas-powered solutions are out of the mainstream, making HYLN stock fairly risky.

On the other hand, it’s certainly good that Hyliion’s ERX system can utilize hydrogen as well as natural gas. Still, many companies will likely prefer to buy hydrogen trucks that are specifically made to run on that fuel only.

Another positive factor for Hyliion is that transportation companies with a total of more than 100,000 Class 8 semis have joined Hyliion’s Hypertruck Innovation Council. This shows that many transportation firms are at least interested in the company’s products.

According to FreightWaves, Hyliion has been intentionally vague about pre-orders for the ERX. That said, I was not able to find any information suggesting that the company has booked tens of thousands of pre-orders for the ERX or its hybrid solution, and the company is still reporting very little revenue.

That situation makes Hyliion meaningfully riskier than, say, the Arrival (NASDAQ:ARVL), which has reportedly received orders for 10,000 trucks from UPS, with whom it’s working closely, or Ayro (NASDAQ:AYRO), which has a $314,00 backlog, in addition to reporting nearly $800,000 of revenue for last quarter.

The Bottom Line on HYLN Stock

There’s a great deal to like about Hyliion. But with many question marks facing the company and the shares still trading at a hefty market capitalization of nearly $1.5 billion, its risk-reward ratio looks negative at this point.

On the date of publication, Larry Ramer held long positions in ARVL and AYRO. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.